China Bulletin: Bull in a China shop?

China Bulletin

…signs emerged at the end of the third quarter that things may be starting to change...

Market backdrop

Signs emerged at the end of the third quarter that things may be starting to change for Chinese investors, with the large, coordinated stimulus package unveiled at the end of September demonstrating that the Chinese government will do what it takes to support the economy and avoid a more severe downturn.

September’s stimulus announcement was significant. The measures included a half percentage point reduction in the Reserve Requirement Ratio (RRR) to free up about RMB 1 trillion of liquidity in the banking system and make more funds available for lending and investment, a reduction in interest rates for existing mortgages, a lowering of minimum down payments on homes to help support the property market, and new liquidity facilities to help stabilise the stock market and encourage investment.

The Ministry of Finance has since followed up with an additional package of fiscal measures, announced on 12 October, which are designed to prevent the proliferation of financial risks in the economy, and more stimulus measures are expected, with the National People’s Congress Standing Committee meeting on 4-8 November the next potential signpost to look out for.    

Investment perspectives

A game changer or more of the same?

While there is no easy fix to China’s economic problems, the intensifying policy response may represent a signal to re-engage with the world’s second largest stock market:

  • Tail risks have been reduced: September’s large, coordinated stimulus package has served to demonstrate to investors the determination of the Chinese authorities to put a floor under the economy.
  • Valuations are attractive: With valuations at, or around, multi-year lows and trailing earnings growth now starting to show signs of picking up, Beijing’s determination to support growth should help to restore investor confidence.
  • Sentiment could improve further: Additional policy responses over the coming months could further boost confidence, particularly if part of a targeted and measured response designed to avoid the creation of further bubbles in the economy.

Fund positioning

  • JPMorgan Funds - China Fund
  • JPMorgan Funds - China A-Share Opportunities Fund
  • JPMorgan ETFs (Ireland) ICAV - China A Research Enhanced Index Equity (ESG) UCITS ETF

In our China equity funds, over the third quarter we added to stocks that combine a solid yield with growth, for example in utility and consumer electronics stocks. We continue to ensure that we have adequate exposure more broadly to consumption (for example ecommerce) and capital market sensitive stocks (for example insurance).

In terms of future positioning, we await further announcements on potential fiscal stimulus, which could create a demand buffer and stabilise earnings more broadly.

Investment focus

Focus on the alpha, not the beta

Many Chinese companies are already adapting to the slower growth environment by improving their capital allocation and by looking to boost shareholder returns. The key for investors is to be able to differentiate between the companies that are adapting to China’s new slower growth environment and are able to still grow their earnings over time, and those that are being left behind. There are examples across both the state-owned and private sectors to illustrate how companies are adapting.

Major state-owned companies have a track record of paying dividends to minority shareholders
China Construction Bank, for instance, has a provided a relatively stable income stream to its shareholders for many years, while oil and gas company Sinopec has maintained an attractive dividend payout for many years.

Private companies are now focusing much more on shareholder value as the economy slows
In the ecommerce sector, for example, Alibaba has implemented its first regular dividend and a significant share buyback programme, reflecting a broader trend among Chinese companies to focus on shareholder returns rather than aggressive reinvestment. Alibaba’s dividend yield, combined with its buyback programme and future earnings growth, offers attractive total return potential for investors.

Chinese companies are adapting to boost future growth potential
Dairy producer Mengniu has been focusing on improving its product mix and expanding its market share, which should support its long-term growth prospects, while gas distributor China Resources Gas has been expanding its customer base and investing in infrastructure to support future growth. Its focus on operational efficiency and cost control has also helped improve profitability.

For Professional Clients/ Qualified Investors only – not for Retail use or distribution. 

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy.

As the product may not be authorised or its offering may be restricted in your jurisdiction, it is the responsibility of every reader to satisfy himself as to the full observance of the laws and regulations of the relevant jurisdiction. Prior to any application investors are advised to take all necessary legal, regulatory and tax advice on the consequences of an investment in the products. Shares or other interests may not be offered to, or purchased, directly or indirectly by US persons. All transactions should be based on the latest available Prospectus, the Key Information Document (KID) and any applicable local offering document. These documents together with the annual report, semi-annual report, instrument of incorporation and sustainability-related disclosures, are available free of charge in English from JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, your financial adviser or your J.P. Morgan Asset Management regional contact or at . A summary of investor rights is available in English at https://am.jpmorgan.com/lu/investor-rights. J.P. Morgan Asset Management may decide to terminate the arrangements made for the marketing of its collective investment undertakings.

For ETFs, Units in Undertakings for Collective Investment in Transferable Securities (“UCITS”) Exchange Traded Funds (“ETF”) purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them.

In Switzerland, JPMorgan Asset Management (Switzerland) LLC, Dreikönigstrasse 37, 8002 Zurich, acts as Swiss representative of the funds and J.P. Morgan (Suisse) SA, 8 Rue de la Confédération, 1204 Geneva, as paying agent of the funds. JPMorgan Asset Management (Switzerland) LLC herewith informs investors that with respect to its distribution activities in and from Switzerland it receives commissions pursuant to Art. 34 para. 2bis of the Swiss Collective Investment Schemes Ordinance dated 22 November 2006.

These commissions are paid out of the management fee as defined in the fund documentation. Further information regarding these commissions, including their calculation method, may be obtained upon written request from JPMorgan Asset Management (Switzerland) LLC. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

09dm240511084607